Achieving Trading Equilibrium: 20 Feb

Market Summary

Equities ended the Thursday session on their highs with small caps in the lead. The Russell 2000 gained 1.1% while the S&P 500 rose 0.6% with all ten sectors posting gains.

Prior to the open, the market appeared to be headed for a lower start as disappointing data from China, Japan, and the eurozone weighed on index futures. Specifically, China's HSBC Manufacturing PMI fell to 48.3 from 49.5 (49.4 expected), Japan posted a record trade deficit of JPY1.82 trillion (JPY1.56 trillion expected), and the Manufacturing PMI for the eurozone (53.0 versus 54.0 expected) disappointed.

Despite the weak data from overseas, equity futures were able to find support when a better-than-expected Markit Manufacturing PMI for the U.S. was released (56.7 actual versus 53.0 expected). Historically, the data point has not been known for eliciting a noteworthy reaction in the market, but today's number likely fueled some short covering activity that sent futures back to their flat lines by the opening bell. In addition, buying ahead of tomorrow's options expiration likely factored into the morning rebound and the daylong rally.

Once the session got going, stocks saw a mild dip, which was erased within the first hour of action. Small caps enjoyed a strong session from the get-go after Facebook (FB 69.63, +1.57) announced the $16 billion acquisition of WhatsApp, a mobile messenger service.

With small caps charging ahead, the rest of the market followed suit. Although the S&P 500 ended on its high, the largest two sectors—financials (+0.3%) and technology (+0.3%)—could never catch up to the index. However, the market did receive support from the third largest sector—health care—which gained 0.9%.

Another countercyclical group—consumer staples (+0.5%)—finished behind the broader market as Wal-Mart (WMT 73.52, -1.33) weighed. The retail giant fell 1.8% after its cautious guidance overshadowed its bottom-line beat.

Also of note, the industrial sector (+0.8%) outperformed as transports rallied broadly. The Dow Jones Transportation Average jumped 1.6% with all 20 components posting gains. Despite the sharp move, the bellwether complex was unable to regain its 50-day moving average (7278), which was violated on Tuesday.

Treasuries ended modestly lower with the benchmark 10-yr yield up one basis point at 2.75%.

Participation was on the light side as 660 million shares changed hands on the floor of the NYSE.

Today's economic data featured four reports:

The weekly initial claims level fell to 336,000 from an unrevised 339,000 while the Briefing.com consensus expected the reading to fall to 335,000. There were no seasonal biases or unusual events reported in the data. The initial claims level is holding firmly between 330,000 and 340,000.
The Conference Board's Index of Leading Indicators increased 0.3% in January after a downward revision to unchanged (from +0.1%) in December. The Briefing.com consensus expected the index to increase 0.4%. The increase in the index was largely the result of the initial claims level returning to normal levels following unusual seasonal biases in the data. That component added 0.24 percentage points to the January increase in the index after reducing growth by 0.34 percentage points in December.
Manufacturing activity in the Philadelphia region contracted for the first time since May 2013. The Philadelphia Fed's Business Outlook Survey for February dropped to -6.3 from 9.4 while the Briefing.com consensus expected the Index to decline to 7.4. Manufacturers commented to the Philly Fed that severe winter storms affected the region and reduced business activity. If this is true, then the contraction should not last long. We are hesitant to blame all of the weakness on the weather. Poor economic data have been reported for the last two months, and evidence suggests that the overall economy is to blame for the sluggishness and not necessarily the weather.
Consumer prices increased 0.1% in January, down from a 0.2% increase in December. The Briefing.com consensus expected the CPI to increase 0.2%. Inflation growth remains tame, and there was nothing in the data that suggests any type of breakout. Food prices rose 0.1% after being unchanged in December. Excluding food and energy, core CPI increased an in-line 0.1% for a second consecutive month.

Tomorrow's data will be limited to the Existing Home Sales report for January, which is set to be released at 10:00 ET.